2. PROPERTY, PLANT & EQUIPMENT
Overview on the topic:
Chapter Title Sub-topics___
15 PPE –Part 1 Initial recognition & measurement
16 PPE –Part 2 Subsequent measurement
Related standard:
• PFRS 16: Property, Plant and Equipment
3. Chapter 15 PPE (Part 1)
Learning Objectives
• Measure the initial cost of a PPE and identify
the point where the capitalization of costs
ceases.
• Provide examples of the common classes of
PPE and state some of the peculiar costs
capitalized for each class.
• Identify the different modes of acquisition of
PPE and state the initial measurement of cost
for each mode.
4. Characteristics of PPE
a. Tangible assets – items of PPE have physical substance
b. Used in normal operations – items of PPE are used in
the production or supply of goods or services, for rental,
or for administrative purposes
c. Long-term in nature – items of PPE are expected to be
used for more than a year
5. Examples:
• Land used in business
• Land held as future plant site
• Building used in business
• Equipment used in the production site
• Equipment held for environmental and safety reasons
• Equipment held for rentals
• Major spare parts and long-lived standby equipment
• Furnitures and fixtures
• Bearer plants
6. Not PPE:
• Land held for speculation
• Land held for an undetermined future use
• Land and/or buildings classified as investment property under PAS
40 Investment Property
• Property held for sale in the ordinary course of business
• Biological assets related to agricultural activity, other than bearer
plants
• Intangible assets
• Minor spare parts and short-lived standby equipments
7. Recognition
The cost of an item of property, plant and equipment shall be
recognized as an asset only if:
a. it is probable that future economic benefits associated with
the item will flow to the entity; and
b. the cost of the item can be measured reliably.
9. Initial measurement
• An item of PPE is initially measured at its cost.
Elements of Cost
1. Purchase price, including non-refundable purchase
taxes, after deducting trade discounts and rebates.
2. Costs directly attributable to bringing the asset to the
location and condition necessary for it to be capable of
operating in the manner intended by the management.
3. Present value of decommissioning and restoration
costs to the extent that they are recognized as obligation
10. Examples of attributable costs:
1. Costs of employee benefits (as defined in PAS 19 Employee Benefits) arising
directly from the
2. Construction or acquisition of the item of property, plant, and equipment.
3. Costs of site preparation.
4. Initial delivery and handling costs.
5. Installation and assembly costs.
6. Costs of testing gross of disposal proceeds of samples produced when
testing equipment
7. Professional fees.
11. Examples of costs that are expensed outright are:
1. Costs of opening a new facility.
2. Costs of introducing a new product or service (including
costs of advertising and promotional activities
3. Costs of conducting business in a new location or with a new
class of customer (including costs of staff training); and
4. Administration and other general overhead costs.
12. Cessation of capitalizing costs to PPE
• Recognition of costs in the carrying amount of an item of
PPE ceases when the item is in the location and
condition necessary for it to be capable of operating in
the manner intended by management.
13. Measurement of Cost
• The cost of an item of PPE is the cash price equivalent at the
recognition date.
• If payment is deferred beyond normal credit terms, the difference
between the cash price equivalent and the total payment is
recognized as interest over the period of credit unless such interest is
capitalized in accordance with PAS 23 Borrowing Costs.
14. Cost of Land (Property)
1. Purchase price including other necessary costs such as broker’s
commissions.
2. Closing costs, such as titling costs, attorney’s fees, and recording
fees.
3. Costs incurred in getting the land in the condition for its intended
use, such as surveying, grading, filling, draining, and clearing.
4. Unpaid taxes prior to date of acquisition assumed by the
buyer.
5. Assumption of any liens, mortgages, or encumbrances on the
property
15. Cost of Land (Property)
6. Special assessments for local government-maintained
improvements, such as pavements, streetlights, sewers, and
drainage systems.
7. Option paid to acquire the land.
8. Costs incurred to induce tenants to vacate premises and costs of
relocating and reconstructing property belonging to others.
9. Initial estimate of restoration costs for which the entity has a
present obligation
10. Any additional land improvements that have indefinite useful
life such as costs of draining, clearing, grading, leveling and filling,
surveying, subdividing, and other permanent improvements.
16. Land improvement
• Land improvements are enhancements to the land which have
definite useful life, such as private driveways, walks, fences,
parking lots, drainages and water systems, and cost of trees, shrubs,
plants and other landscaping.
17. Cost of purchased Building (Plant)
1. Purchase price including other necessary costs such as broker’s
commissions and legal fees.
2. Assumption of any liens, mortgages, or encumbrances on the
property
3. Option paid to acquire the building.
4. Unpaid taxes prior to date of acquisition assumed by the buyer.
5. Costs incurred to induce tenants to vacate premises.
6. Costs of getting the building in the condition for its intended
use, such as remodeling, renovation, and other repairs prior to
occupancy.
19. Cost of self-constructed Building (Plant)
1. Materials, labor, and overhead costs incurred during construction.
2. Architectural costs, supervision costs, and costs of building permit
3. Excavation costs
4. Insurance costs and safety inspection fees
5. Costs of temporary structures built during construction
6. Interest on borrowings made to finance construction (Borrowing
costs are discussed in Chapter 18)
20. Cost of self-constructed Building - continuation
The following costs are not included in the cost of a self-constructed
building:
1. Internal profits or savings on self-construction
2. Cost of abnormal amounts of wasted material, labor, or other
resources due to inefficiencies
3. Costs of uninsured hazards or claims for uninsured accidents
4. Costs of private driveways, walks, permanent fences, parking lots,
and drainages and water systems that are not included in the
building’s blueprint
21. Building improvement
• Building improvements refer to costs incurred subsequent to
occupancy of a purchased building or subsequent to completion of a
self-constructed building that either increase the useful life of the
building or improve its current state.
23. Cost of equipment
1. Purchase price including other necessary costs such as broker’s
commissions and non-refundable purchase taxes.
2. Freight, handling charges, and insurance on the equipment while in
transit
3. Cost of necessary special foundations or platform,
4. Assembling and installation costs
5. Costs of testing and conducting trial runs
6. The initial estimate of decommissioning and restoration costs for
which the entity has a present obligation
24. Cost of equipment - continuation
• The following costs are not included in the cost of an equipment:
1. Cost of relocating the equipment after it has been put to the
location and condition originally intended by management.
2. Cost of training personnel who will be responsible in operating the
equipment.
3. Cost of dismantling and removing an old equipment belonging to
the entity prior to the installation of a new equipment.
27. Lump-sum purchase
• The acquisition cost of a group of items of PPE acquired on a
lump-sum price (basket price) is allocated to the
individual assets based on their relative fair values at
the date of purchase.
32. Demolition costs
• The accounting treatment for demolition costs depends on the reason for
the demolition.
Example:
Case: An old structure is demolished to make way for the construction of a
new building.
Accounting: The demolition costs are considered as costs of site preparation
under PAS 16.; and therefore, capitalized as cost of the new building.
❖ Any proceeds from sale of salvaged materials from the demolition are
deducted from the demolition cost that is capitalized to the new
building.
34. Acquisition through exchange
• If the exchange has commercial substance, the asset received from
the exchange is measured using the following order of priority:
a. Fair value of asset Given up Plus cash Paid/ minus cash received
b. Fair value of asset Received
c. Carrying amount of asset Given up Plus cash Paid/ minus cash received
• If the exchange lacks commercial substance, the asset received from
the exchange is measured at (c) above.
37. Acquisition through issuance of own equity
instrument or debt instrument
The assets acquired is measured using the following order of
priority:
1. Fair value of asset Received
2. Fair value of instrument Issued
40. Acquisition by donation
Items of PPE received as donation are measured at fair value and
accounted for as:
a. Income – if the donor is an unrelated party.
b. Donated capital – if the donor is an owner (shareholder).
c. Government grant, in accordance with PAS 20 Accounting for
Government Grants and Disclosure of Government Assistance.
Accounting (see Chapter 17) – if the donor is the government.
